Canada’s main stock index managed to eke out a minor gain Tuesday as U.S. stocks closed sharply higher after another volatile day.
The Toronto Stock Exchange’s S&P/TSX composite index was ahead 29.12 points or 0.19% at 15,363.93, led by strong gains in the health-care and base metals sectors.
Trading was choppy in the early going Tuesday, after the TSX plunged in initial trading before paring its losses to 61.64 points or 0.4% by mid-afternoon.
In New York, the Dow Jones industrial average finished the trading session up 567.02 points or 2.33% at 24,912.77 — coincidentally, about the same amount it plunged at the opening of markets. The Dow had posted its biggest percentage decline since August 2011 on Monday.
Meanwhile, the S&P 500 — a broader market barometer that is comparable to the TSX — was up 46.20 points or 1.74% at 2,695.14. The Nasdaq composite index was up 148.35 points or 2.13% at 7,115.88.
“I’m not sure anything can surprise me at this point, however I do wish I had a degree in psychology … because so much of this market is being led by the psychology of investing,” said Craig Jerusalim, portfolio manager of Canadian equities at CIBC Asset Management.
“At least today, earnings are quite robust and it’s all price that’s coming down.”
While many market observers say a correction was expected after a decade-long bull run, the trigger that sparked the sudden downturn is thought to be U.S. figures released last Friday that suggested long-anticipated wage growth has started to kick in, resulting in inflation and a greater potential for the U.S. Federal Reserve to raise interest rates.
An increase in interest rates pushes bond yields higher and makes such fixed-income investments more attractive and thus, bets on corporate earnings and dividends less attractive.
The Toronto Stock Exchange had experienced a longer six-day decline prior to Tuesday’s close, but drops have not been as steep as in U.S. markets. It ended last week down 4% before closing down another 1.7% Monday as the downward pressure on markets around the world took Canada’s largest exchange down with it.
“The TSX was already trading at a discount to the U.S. markets so there wasn’t that much to correct,” said Jerusalim.
The commodity-heavy index’s continued selloff is an indication that after a long period of market stability, investors are getting re-acquainted with volatility, says Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc. in Toronto.
“Monday was the first taste of meaningful volatility that we’ve had in over six years and so investors were trying to figure out what to do and how to handle it.”
Federal Finance Minister Bill Morneau addressed the recent volatility in comments made to the press on Tuesday.
“I understand that people are concerned about their investments, their pensions,” he said. “I think it’s important to separate the real economy from the stock market. Our real economy is doing fine.”
Morneau added that stock market fluctuations won’t affect budget planning.
The steep drops Friday and Monday wiped out the gains the Dow and S&P 500 made since the beginning of the year, but both remain higher over the past 12 months. The Dow is up 24% over that time, the S&P 500 18%.
Even after Tuesday’s gain, the S&P 500 is still down 6.2% from the recent record high it set on January 26. That’s less than the 10% drop that is known on Wall Street as a “correction.”
Corrections are seen as entirely normal during bull markets, and even helpful in curbing excessive gains and allowing new and allowing new investors to buy into the market at lower prices.
In currency markets, the Canadian dollar closed at an average trading value of US79.81¢, down 0.30 of a U.S. cent. The loonie has slipped US1.57¢ since Friday as jittery investors seek the U.S. greenback as a safe haven in times of distress.
On the commodities front, the March crude contract was down US76¢ to US$63.39 per barrel and the March natural gas contract was up US1¢ to US$2.76 per mmBTU.
The April gold contract was down US$7.00 to US$1,329.50 an ounce and the March copper contract was down US3¢ to US$3.19 a pound.